I've written about Brazil pre-Lula and post-Lula and spent the last five years covering all aspects of the country for Dow Jones, Wall Street Journal and Barron's. Meanwhile, for an undetermined amount of time, and with a little help from my friends, I will be parachuting primarily into Brazil, Russia, India and China. But will also be on the look out for interesting business stories and investing ideas throughout the emerging markets.

In China, Why Piracy Is Here To Stay

Cheap knock-offs is sort of a thing in China. They call it the shanzhai — imitation and piracy of name brands, be it Gears of War for PlayStation or the latest Adobe Photoshop.

In China, said Tom Doctoroff, author of the book “What Chinese Want” and a China marketing guru at J. Walter Thompson, managing a fake Apple store, or any kind of fake this or that, is heralded as good ole fashion entrepreneurship.

“When it comes to innovation, the Chinese won’t deliver,” he told me in a phone interview back in mid-May. “China is the total flip-side of the U.S. Piracy goes back to the China world view that individual rights don’t matter. The courts have never evolved to protect innovative individuals. There is still very much the ethos that economic growth has to be managed, so individual and intellectual property, where the spoils go to one entity or one person, is not a cultural value,” he said.

IP protection will always be an uphill struggle in China and for companies doing business there. And that’s mainly because of the fact that individual rights remain a theoretical notion at best. Chinese civilization exists courtesy of a top down structure. Even the education system mitigates against broad-based embrace of IP protection. Until IP infringement is seen as an immediate threat to economic success, or advanced as a vital state interest, few will really care whether Windows 8 is a knock-off, or if the X Box 360 sold in Shanghai is being hacked to allow for a pirated version of 2K Sports NBA Basketball.

Microsoft ran its anti-piracy ad in China when it launched Windows 7 to counter the bad habit. In the ad, two young Chinese techies are seated at a desk. The guy who paid full price is being heralded by his thumbs-up boss as a good worker. His bamboo plant is growing tall and green in a pot on his desk. His trash can is clean, save for maybe one piece of paper. Behind him is the guy using the pirated version of the software. And man does he look down. A big X on his screen, head in his hands. Boss pointing a finger at him, trash can full of paper, power cords tangled up all over the place, and wilted flowers on his desk to add to his miserable work life.

Yet, many Chinese think illegal software is the smart choice because it’s cheaper. Computer sales people have incentive to reinforce this perception because they can increase sales margins by replacing genuine with copies instead.

Wei Quing, head of Microsoft’s Windows business group in China, told Doctoroff in his book that the company was trying to “create a new religion, a new standard of civility in China. It will take a long time.”

Research suggests that preliminary efforts have helped increase preference for the genuine, but not enough to make a serious dent in the pirated versions of the same goods. The government of China knows that current copyright infringements cannot be legally justified under the World Trade Organization, but it is unable or maybe even unwilling to confront the problem.

That’s software. It gets even more flagrant with filmed entertainment. Pirated Hollywood (and Chinese) films are sold on the cheap on street corners across the country, not to mention inside smaller, private shopping centers.

Government censorship polices further complicate matters because they increase the demand for contraband content. Even if the Communist Party liberalizes distribution restrictions, per WTO regulations, censors will sanction only a narrow range of content in legal channels, both online and in actual stores. This begs the question of Chinese censorship and what is and is not allowed, Doctoroff said. In his book, he writes:

As in dynastic times, anything inconsistent with the government’s role of promoting a harmonious society will be prohibited. Notably, groups must never seek to become alternative centers of authority and challenge the party, and explicit or extramarital sexuality is always banned. The latter is driven by both the sensitivities of a generally conservative population and the government’s patriarchal responsibility to protect the moral standing of the masses.”

China’s official view on piracy is more “don’t ask, don’t tell” than anything else. Illegal video games are pervasive in internet bars. Illegal DVDs are simply sold right out in the open. The Chinese internet is loaded with porn of all stripes; so much for concern over the moral standing of the masses.

While this may seem profoundly hypocritical, the Chinese consider it pragmatic. Understatement — knowing when to turn a blind eye to transgression — is both a skill and contributor to social order. The government realizes that the people in China are torn between Confucian regimentation and upwardly mobile ambition, and therefore are emotionally repressed and crave release, Doctoroff said. So long as the channels through which this is delivered remain narrow and pose no threat to centralized authority, they will be accommodated.

“To steal a book is an elegant offense,” Doctoroff told me. “It’s recovering wisdom. Especially if you were not supposed to read the book in the first place. In China, people do get the link between IP and innovation, for example, but it doesn’t go very deep. Companies like Universal and Warner Brothers will just have to lower their margins to next to nothing to compete. A sale is a sale; some money is better than no money at all. This is a society where, if you open a fake Apple store, people start writing articles about how innovative and creative you are,” he said.

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You could have said the same of Taiwan and S Korea a generation ago. Now they’re mostly legit markets and their companies are busy protecting their IP rights. So it’s a dynamic situation shaped by economic development. One caveat is that China’s rulers put politics first, as you noted. I’m less convinced by the cultural arguments.

I strongly disagree with what Doctoroff said about innovation in China. China has a long tradition of creativity and innovation. According to such scholars as Joseph Needham and John M. Hobson, China was far ahead of Greco-Roman civilization in technology and this Chinese technological superiority lasted until the end of the 18th century. Also a well-respected sinologist Robert Temple indicated that more than 50% of the inventions that laid the foundations for the modern world before the Industrial Revolution came from China. I fully agree with these scholars. China fell behind, because it missed out on the Industrial Revolution. Before the Industrial Revolution Europe was basically a copying and adaptive culture, not an innovative one. Let me give you a few examples how Chinese inventions influenced Europe greately. China invented paper, printing including movable type(about 400 years before Gutenberg), compass, cast iron (in the 5th BC, Europe didn’t have cast iron until the late 14th century when it finally had the technology to melt iron ore), Bessemer Process for steel, blast furnace, coaking coal, not only gunpowder, but also gun,cannon, bomb, land mine,sea mine, rocket, also multi-stage rocket( carried both incendiary and explosive bombs). The spread of Renaissance would have been impossible without such Chinese inventions as paper and printing. The European overseas voyages would have been also impossible without such Chinese inventions as compass and leeboard. How about the European gunpowder weapon revolution by using such Chinese inventions as gun, cannon, bomb, rocket, mine? Can you imagine the modern military without the Chinese inventions. As a matter of fact the Ming Dynasty was the first gunpowder weapon state in the world. Also the Industrial Revolution would have been impossible without such Chinese inventions as blast furnace, coaking coal. Bessemer Process for steel. These are just a few of many Chinese inventions that revolutionized Europe. Even the modern science was born in the Islamic civilization with the birth of the experimental scientific method. This is the reason why Ibn al Haytham is sometimes called the first scientist in the world(strictly speaking all the ancient civilizations didn’t have science, just proto-science). As you can see Europe was copying and adaptive culture,not an innovative one before the Industral Revolution. Let’s take a look at America’s past as an innovative nation. There is an article titled, A NATION OF OUTLAW, A CENTURY AGO, THAT WASN’T CHINA—- IT WAS US on Aug 26, 2010 The Boston Globe. According to this article, when America was a developing country in the 19th and early 20th centuries, America stole and copied other nations’ ideas and inventions without regard to copyright,trademark patent. This article really shows how sorry America was, when it came to innovation and creativity. Germans did the same thing by stealing and copying from Britain in the 19th century. Now let’s look at Japan and South Korea. Japan used to be a copycat in the 50s and 60s, but now it is one of the top innovatve nations. I also remember South Korea used to be the biggest copycat in the 80s and 90s that engaged shamelessly in IPR violations. I know this very well,because I happen to be Korean. But now South Korea like Japan is also one of the most innovative countries in the world. By the way in Korea, IPR protection is strictly observed. I have been observing China for many years, the IPR situation is getting better slowly but surely. China is just going thru the copying and adapting stage that Germany, America, Japan, South Korea went thru before. This Doctoroff guy is full of crap. His amateurish analysis of traditional Chinese Confucian culture is laughable. Both Japan and Korea are Confucianist countries. All of those ground breaking Chinese inventions were made in very Confucian authoritarian culture. Also Japan’s innovative foundations were laid during the authoritarian Meiji Era in the late 19th century. For South Korea, the country’s innovative foundations were laid during the very Confucian and authoritarian miilitary dictatorship in the 60s and 70s. As a matter of fact, democracy and freedom has little to do with innovative power. The very high-tech but authoritarian Nazi Germany is a good example. The Germans invented jet aircraft and coal liquefaction technology and many moe. All these German innovative technological foundations were laid in the 19th century during the very authoritarian imperial Germany.This Doctoroff obviously doesn’t know what he is talking about, when he comes to Confucianism and it’s contribution to the East Asian innovation power,specially Chinese one. The most important infuence that Confucianism has on our East Asians is the absolute reverence for education. China moved away from strict rote learnig about 10 years ago like Japan, Korea to stressing critical thinking that is esential to creativity. The results of the education reform were very evident on the 2009 PISA test in which students from Shanghai and 9 other Chinese regions did extremey well. As a matter of fact, All East Asian countries were in the top five. On the other hand American students did poorly. According to Dr. Andreas Sleicher who was in charge of the PISA test, you can not do well, if you lack creative thinking. As China gets more developed and richer, the respect for IPR will get stronger, because China realizes that IPR protection is a must to foster Chinese innovation. It’s already happening slowly as it happend in South Korea 20 years ago.

If you exchange in most cases “China” with “Mexico” in this note, will be the same for me. Living here in Mexico City you find the same cases, except that we don’t have an “Pear Store”, but in bazaars and in the streets you find any video game (Wii, X360, PC game), any software, any movie (DVD, BD), any music CD. That’s for digital products. You can buy the so called “original copy” of Louis Vuitton purse (and really you can’t tell the difference) for example. And that’s something wierd cause here we have laws to fight against piracy. In 2009, an study showed that 54% of the formal business in Mexico sold piracy. With that number you can’t fight.

I find nothing wrong with piracy. I don’t believe in copyright or patents. The idea is just ridiculous. I believe people have the right to distribute anything they want, as long as it’s not actually stolen (ie actually taking someone’s property). People seem to confusion production with stealing. If I steal 100 PlayStation from Walmart, that is stealing. But if I can make a PS3 in my own garage, or I have a business that sells modified Playstation 3′s that plays pirated games, that is not stealing. The US and the rest of the world can learn from China, which is less IP and more freedom.